A smart expatriate, Eric Kraus, gives a rant about the decline of the West

Summary: As the saying goes, with distance comes perspective. Eric Kraus writes from Russia about the decline of the West, a theme frequently discussed on the FM website — to which he brings some new insights. But the future will be what we make it.

“Never let the future disturb you. You will meet it, if you have to, with the same weapons of reason which today arm you against the present.”
— Marcus Aurelius Antoninus, Meditations (c. 161 – 180)

“Difficult to see. Always in motion is the future.”
— Yoda, in The Empire Strikes Back

A Rant about the Decline of the West

From “The Fear Issue“, Eric Kraus and Alexander Teddy, Truth and Beauty, 18 July 2012. Reprinted with their generous permission.

At the end are links to other essays by Kruas, and more posts about the decline of the West.

Introduction

The good news is that we have a ringside seat for the end of the world. The bad news is that we are inside of the ring!

T&B – like at least our Western readers – chose to be born during a blessed era. War was something occurring in far-off places, experienced only on television or in the newspapers; hunger was a state to be actively desired in an era of plethora; poverty was nothing more devastating than the ownership of an old car or having to take the Tube to work – whilst for most of us, after breakfast in Paris, we might take lunch in Marrakesh or in Moscow – or dinner in Beijing.

In our dissipate youth T&B formed part of an empowered and confident rising bourgeoisie – the great Western middle-class. While the periodic financial crises struck us as quite fearsome, in fact they proved to be mere bear markets – momentary disruptions of the steady progression of mankind to a shining and secure future. Like citizens of Imperial Rome (or Soviet Moscow), we could not imagine a collapse of what seemed so solid, so stable – disregarding the fragility of a complex system subtended by a vital web of trading relationships, military force, financial flows, divisions of labour, and a socio-political organization combining compulsion with rewards, transforming economic wealth into political power. We can be forgiven for having missed the fragility of the system into which we were born – which thus seemed to us nothing more than the natural order of things.

By definition, the decline of any empire begins the morning after its apogee – the West almost certainly crested on the evening in 1989 when the Berlin Wall came down. We can still hear History laughing at the prognostications of her demise; the sole great power came to imagine that its supremacy would fall outside the march of time – 20 years later, “History” is in ruddy good health!

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1989 can also serve as a marker for the beginning of the Great Credit Bubble – or rather, of the rolling bubbles with the illusion of economic growth and prosperity maintained by artificial means: massive credit creation, with a series of asset bubbles, the last of which was the US mortgage bond pyramid.1

Note #1: Across the Atlantic, debt-fueled property speculation occurred in only a couple of “peripheral” countries, but a massive bubble was instead blown by bank financing of government deficit spending – in the wake of the Lehman’s collapse, the European situation suddenly went toxic.

A Handful of Dust – A Trader’s Lament

It is hard for those of us living in market-land to remember that there was a time when each morning one could turn on one’s Bloomberg without a sense of dread. A time when we feared, at worst, a trade going against us, or a market sell-off, a rate hike — not the collapse of the entire socioeconomic system that feeds and protects us; such fears were once the appanage of cranks, survivalists, and Austrians. No longer – catastrophism has gone distinctly mainstream!

Speaking with our friends in finance, everyone suddenly seems to hate his job – even those who are still making money find it deeply dissatisfying. Fundamental research (never T&B’s stock-in-trade) has become almost comically irrelevant; markets have no discernible pattern other than nervous oscillation, while one gets a sore neck following the steady stream of contradictory headlines, brainless policy declarations, broken promises, failed summits and political incompetence elevated to the level of fine art. The volatility is fierce but cyclical, with a general sense that we are living on borrowed time – no one has much idea of what lies on the other side of the approaching discontinuity. Even in September 2008 – as we watched in terror the US financial system accelerate into a death spiral, dragging the world in its wake – along with some gallows humour, there was an excitement – almost a sense of elation; at least it was happening fast.

No longer – now we are living a slow-motion train wreck, a gradual drift into madness as European “policy-makers” are reminiscent of the last, panicked months of the pre-crisis Yeltsin government – when each day brought its crop of wildly contradictory statements, absent any coordination or concern with market impact –

Schäuble contradicts Merkel;

Van Rompuy announces solutions when none are at hand;

Merkel cuts deals – then freely reinterprets them to suit her domestic audience;

German councils of the Good and the Great demand that mere anarchy be unleashed upon the world, oblivious to the fact that a Euro collapse would crush an export-dependent German economy which still sends 40% of its exports to Europe;

France blithely calls for growth, then opts for those same methods which have so effectively stifled it;

whole countries go into denial;

the Finns and the Dutch appear intent upon torpedoing any rescue package whatsoever, avoiding the need to pay other folk’s debt, while blithely indifferent to the infinitely greater cost of a European meltdown;

the Greeks are being Greek, while the Spanish – having latterly gotten religion – struggle valiantly to avoid a collapse that only a joint European approach can avoid.

It is like watching laughing children happily tossing about a live hand-grenade. This is no way to run a continent!

History Accelerates

Long-time readers will know that T&B is not inclined towards predictions of imminent apocalypse; the end of the world is, almost by definition, an outlier; our general bias is towards gradual rise and decline; tacit Karl Rove, great empires do not in fact “create their own reality” – what they do is to create the illusion of a reality, and this illusion is tenacious, and under ordinary circumstances fades only very slowly.

There are, of course, exceptions – catastrophic events which accelerate the natural processes of rise and decay: the declines of the Austrian, Turkish and Tsarist empires were catalysed – but certainly not caused – by the Sarajevo assassination of an otherwise-superfluous Austrian Archduke. The 1931 failure of Austria’s Creditanstalt was only the culmination of a slow collapse in Austrian finance (itself largely a function of the settlement at Versailles), yet it triggered a catastrophic chain reaction culminating in a wave of bank failures, economic depression, and ultimately war. Twenty years ago, the slow rot within the Soviet Empire suddenly accelerated into a catastrophic implosion no one had seriously envisioned a few years previously.

For the second time in the past five years, we are credibly threatened with the risk of a true discontinuity. There is no certainty here – any attempt to calculate the odds of a catastrophe is an exercise in futility. What is clear however is that, given the depletion of G7 Central Bank and governmental resources, the situation is infinitely more dangerous than in 2008, while the irresponsibility and incompetence of European governments seems quite breathtaking.

Again, the outcome is not pre-ordained – the newly-minted Cassandras jostling for a media slot to intone about the “inevitable” catastrophe in the Eurozone are fools – neither they, nor your correspondent, nor you, dear reader, has any certainty as to what the outcome will be. They could conceivably be proved right, but that would constitute a failure of the political process – not the obligate outcome of some law of nature. What we can say with a high degree of conviction is that, broadly speaking, there are two possible outcomes: a rapid acceleration of European integration with a “lost-decade” – i.e. a prolonged gradual deflationary unwind or, yes, an economic catastrophe causing irreparable damage to the West – but not, quite fortunately, to the “World”.

The East is Red…

If T&B has had a single major theme over the past 15 years, it has been the secular decline of the West (and of its première power – the United States2) as the Asian century gets underway in earnest. While much has been made of the relative ascendency of the emergings vis-à-vis the G7 powers, we think that this is largely a function of the phenomenal growth of Greater China and its Asian appendages; we are somewhat sceptical of the concept of the BRICs as a major economic bloc – the top commodities suppliers, Russia3 and Brazil (as well as Argentina, Indonesia, etc.) should do well from the rise of China; India and South Africa are outliers.

Note #2: For the one-hundredth time, we are not, and never have been predicted the disappearance of the US as a unitary state, nor even as a great power; we are speaking solely in terms of relative decline.

In the past decade, the US has lost two major wars, suffered stagnating incomes, shed a fraction of its middle class, run up an unsustainable deficit, while its political system has become largely dysfunctional due to extreme partisanship. Its soft-power has been substantially eroded; its financial model is under challenge following the carnage of 2008,while the primacy of the US dollar has been artificially prolonged only by the havoc in Europe.

Note #3: According to that notoriously anti-American institution Goldman Sachs, China will be the world’s largest economy early next decade – T&B suspects that, at least in PPP {purchasing power parity} terms, it already may be (certainly, if one accepts the claim that the RMB is massively undervalued, then China is already number one). Neither French nor British global primacy survived long into the 20th Century – yet both countries are still very much with us – indeed, arguably better off devoid of their imperial aspirations.

Whilst the United States is busily seeking to recast itself as a Pacific power, given the overwhelming economic weight of China along the Pacific Rim, they are grasping at straws. Inter alia, Chinese tourism is joining Chinese mineral imports as a major plank of the Australian economy, the Philippines is totally dependent upon Chinese agricultural markets, while Taiwan is increasingly integrated with the mainland; the entire economic elites of Thailand and Indonesia are Chinese, and remain deeply loyal to the motherland – for now, only Vietnam, Singapore and Japan are in play.

A US carrier group could conceivably defend Taiwan against a Chinese amphibious assault, but certainly not from sudden exclusion from all Chinese markets; reunification is thus only a matter of time. Similarly, China is now the predominant economic power for most of South America – Brazil, Argentina, Venezuela, Ecuador, etc. This leaves only Chile, Colombia and perhaps Peru for the putative Trans-Pacific Pact.

The Atlantic Alliance – A Great Future (Behind it)

A nasty schadenfreude is manifest in the Anglo-Saxon press, with some American commentators apparently happy to see the Euro crisis distract attention from their equally dire straits. This, of course, misses the point: The West Inc. – at least as we have known it since 1945 – is very much a unitary phenomenon; were any part to crumble, the whole would be severely affected.

While the US was and remains primus inter pares, its post-war power base was built upon an Atlantic military alliance held together by the perceived Soviet threat, a set of global financial institutions specifically designed to further US economic interests, the primacy of the dollar in global trade, a unitary political philosophy (the “Washington Consensus”) and the complete absence of any credible competitor of adequate size and global reach. All of these factors are now reaching an end:

(a) Dilution effect: at its peak, the US accounted for ~37% of global GDP; that fraction has now dropped below 25%, and can be expected to further contract as the US sees relative GDP stagnation, while at least some subset of the emergings continues to enjoy rapid growth.

(b) The fiscal time bomb: The panic about Europe (with a blended debt level of ~4% GDP) has conveniently distracted attention from the US fiscal deficit (>8%). Even ex-unfunded liabilities, the US now has a government debt/GDP nearing 100%, with no credible plan to reduce it. While thus far this has proved remarkably painless, there is legitimate doubt as to how long this can last – Italy had no difficulty borrowing just 12 months ago, France still can.

(c) Europe: The US is joined at the hip with an old-world in deep crisis. There are several possible outcomes, ranging from the merely depressing to the frankly catastrophic. US commentators will probably become somewhat less smug the day a collapsing European financial system sends Wall Street banking into a death spiral. Our one source deep within in the US administration inform us that the Obama team is desperately pushing Europe to do something – anything – to stave off a meltdown until the day after the US November election; typically bereft of any long-term thinking, they the apparently don’t consider it their problem after that.

(d) Alternative Models: The secular rise of China has provided an alternative model – increasingly attractive to other developing countries. At the very least, China’s success demonstrates that a mixed state-private economy can work, and that free-markets can be successfully dissociated from Western-style representative political systems.

(e) Rebalancing the IFIs {international financial institutions}: A situation in which Belgium has a greater weight in the IMF than does China is simply not sustainable – either the IFIs reform and diversify, or they become an irrelevance. {FM Note: Belgium has 1.86% of total IMF votes, Italy has 3.16%, China has 3.81%, France & UK have 4.29% — see here}.

(f) The rise of the Yuan: While T&B somewhat overestimated the future role of the Euro, we underestimated the speed with which the RMB would gain global market share as China makes the internationalisation of its currency a major priority. While some commentators have expressed scepticism regarding the feasibility of this shift, these tend to be the same people who, a decade ago (when the Chinese economy was one-third its current size), were equally sceptical about the potential economic growth of the Dragon. For a good review of the currency issue by the WTO, see “Use of currencies in international trade: any changes in the picture?“, World Trade Organization, May 2012.

(g) Imperial overreach: Having failed to attain its stated objectives in both Iraq and Afghanistan, and with neither the appetite nor the financial means for further adventures, the US is obliged to seek alliances in pursuit of “regime change” where it is increasingly being blocked by the incipient China-Russia axis. With the defeat of Sarkozy, and the weakening of the political right in Southern Europe, as well as a probable shift leftwards in the next German elections, European governance will be decreasingly Atlanticist in outlook.

Eric Kraus is an expatriate (American?, British?) living in Russia. He’s worked in several investment-related capacities for investment banking firms. He started publishing Truth and Beauty in 1997.

Please join Eric Kraus and Alexander Teddy at the Truth & Beauty website, where you will find back issues, articles of interest, and some lively debate. Readers are encouraged to contribute their views, or suggest articles or research to post.

3 thoughts on “A smart expatriate, Eric Kraus, gives a rant about the decline of the West”

Fascinating article. But there were some unfortunate typos. I’ve corrected them:

“Alternative Models: The secular rise of China the military-industrial-prison-surveillance complex to the complete domination of America has provided an alternative model – increasingly attractive to other developing countries. At the very least, China’s the success of cannibalistic capitalism post-1989 demonstrates that a mixed state-private economy can work, and that in America, as in China and elsewhere, free-markets can be successfully dissociated from Western-style representative political systems.”

9/11 was the union-buster’s dream come true. After 9/11, union organizers, voting rights activists, worker’s rights advocates and those who work for economic justice are now considered “terrorists” and treated accordingly. It’s only a matter of time before America reinstates slavery (but this time, politically correct, and open to all races), child labor, and debtors’ prisons. Soon thereafter, Aztec-style human sacrifice beckons.

The biggest problem for America is how it will manage its relative decline. With constant bankrupting wars or in some other way. I wonder if America can accommodate itself psychologically to be simply one great world power among others? Assuming the role of the exceptional nation, the exceptional people, is a trap because it’s a goal one can never reach. It’s a distorted lens through which one can see neither the world clearly, nor oneself. It hinders self improvement because such would require the heresy of admitting to second rate status in some area. Moreover, it’s logic presupposes every other people and nation in either a subordinate role, or in the role of demonized opponent. An evil doer. Not only is this dysfunctional; it’s dangerous. The claim to full spectrum dominance puts America and everyone else at risk. Such a claim will be and always has been resisted by any people or nation that wishes to remain free, regardless of their form of government, religion, or condition of culture.

Besides, and most importantly for Americans, the requirements of FSD inevitably extend to the “homeland” itself and to loss of individual, civil, and political freedoms as traditionally understood under the US Constitution.